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US buyout group Clayton, Dubilier & Rice LLC has chosen a soft target in approaching Wm Morrison Supermarkets Plc with a 5.5 billion pound ($7.6 billion) takeover proposal. The UK grocer says the price is too low. But its defenses are weak and it could have a fight on its hands to stay independent.
The only surprise about CD&R’s 230 pence per share approach is that it has taken so long for a bidder to emerge. Pandemic shopping habits combined with lackluster share price performances have made grocers alluring buys. Morrison is the smallest of Britain’s so-called big four supermarkets and has all the ingredients to be an attractive PE target.
There’s 5.8 billion pounds of freehold property on Morrison’s books, compared with a market capitalisation of 4.3 billion pounds last week. The share price has underperformed the FTSE All Share Index over the past two years, even amid a turnaround under CEO David Potts. Management has been criticised for receiving high pay despite the poor shareholder returns.
The premium being dangled is 29% above the shares’ last close (which was also roughly their three-month average price) and shareholders would keep a 5 pence dividend. That’s not an offensive offer, but it’s a long way from a knockout. A sweetened proposal with a juicier premium would put the board under real pressure. CD&R won’t want to go hostile, but shareholders could demand that Chairman Andrew Higginson engage. Morrison stock was changing hands in line with CD&R’s mooted price in early trading even though there’s no binding bid yet, suggesting the market sees a reasonable chance a deal will happen.
Given Morrison’s large freehold estate — which accounts for more than 80% of the supermarket’s stores and distribution centres — the traditional defense against a takeover would involve selling off property to raise cash. A mini breakup, disposing of the group’s food manufacturing arm, is the other obvious tactic. Shareholders would get a big windfall from the proceeds and be left with a leaner grocer. Although a private equity bidder may feel comfortable with such strategies, they probably wouldn’t work for Morrison as a public company.
The history of UK retail is littered with such sale-and-leaseback deals that have saddled companies with long rental commitments and too much debt.
—Bloomberg